First it was Japan’s steel makers, now it’s the nation’s power producers that are set to pay for China’s coal policies.
Japanese utilities may pay at least 29 percent more for annual supplies this year after China’s efforts in 2016 to trim overcapacity led to a more than doubling of spot prices, according to UBS Group AG and Morgan Stanley.
Contract talks have begun with coal miners Glencore PLC and Rio Tinto Group, according to a spokesman from Tohoku Electric Power Co., which typically negotiates the deal on behalf of the nation’s electricity providers.
The price of coal used to make steel and fuel power stations surged in 2016 as China, the world’s biggest producer, cut output and boosted imports. Japanese steel makers were forced to pay more than double for quarterly contracts, while global thermal miners saw their shares surge. Glencore, which has typically taken the lead in talks, made an offer in the mid-$80s to Tohoku for thermal supplies, which was rejected, according to a Morgan Stanley report, which cited Platts. Tohoku declined to comment on price.
“The market appears to have tightened over the past six months and the Japanese generally pay a premium over the prevailing spot price for security of supply,” said Matthew Boyle, a Sydney-based industry consultant at CRU Group. “Chinese domestic policy will continue to have quite a strong influence on the seaborne market for both thermal and metallurgical coal.”
Power producers may pay between $80 (about ¥9,188) to $85 for annual supplies starting in April, Morgan Stanley analyst Tom Price wrote in the report earlier this month. UBS predicts a contract price of $81, which would be the highest since 2014. That compares to $62 a ton last year.
The agreed April-March contract will establish a price benchmark for the region that other buyers and sellers will follow. Morgan Stanley estimates the accord covers more than 10 percent of the seaborne thermal coal trade. Glencore and Rio Tinto spokesmen declined to comment on contract talks.
Thermal coal from Australia’s Newcastle port, a regional benchmark, rose 95 cents to $81.95 a ton on Tuesday, according to Globalcoal. Prices have averaged more than $80 the past two months after surging to $110.40 in November, the highest level in more than four years.
China has no plans to reintroduce output restrictions this year as long as prices stay in a range considered acceptable to regulators, according to the National Development and Reform Commission, the country’s top planner. While the NDRC didn’t define the range, the nation’s biggest miner, Shenhua Group Corp., said in November that it is between 550 to 650 Chinese yuan a ton ($79 to $94).
“Negotiations will be interesting this year because spot prices are appreciably higher than what they have been for a while and a lot of that is a result of China’s coal policy,” said Daniel Morgan, an analyst with UBS in Sydney. “Contracts may be settled toward the back end of March.”
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.